Energy and Climate Change CommitteeWritten evidence submitted by the Government’s Fuel Poverty Advisory Group for England

The Fuel Poverty Advisory Group is a non-departmental advisory body, which consists of a chairman and senior representatives from the energy industry, charities and consumer bodies. Each member represents their organisation, but is expected to take an impartial view. The role of the Group is to:

Consider and report on the effectiveness of current policies aiming to reduce fuel poverty;

Consider and report on the case for greater co-ordination;

Identify barriers to reducing fuel poverty and to developing effective partnerships and to propose solutions;

Consider and report on any additional policies needed to achieve the Government’s targets;

Encourage key organisations to tackle fuel poverty, and to consider and report on the results of work to monitor fuel poverty.

Note

The diverse nature of the Group’s membership may, on some occasions, prevent unanimity on some of the following points.

Fuel Poverty Context

1. The Government has a legally binding target to eradicate fuel poverty by 2016.1 FPAG, as the Government’s statutory advisory body on fuel poverty, wants to ensure that Government policies are doing all that is reasonably practicable to meet this target.

2. The Government’s own estimate indicates that in 2012 there are 3.9 million households in England in fuel poverty;2 however some members of FPAG have calculated that with the 2011 energy price rises this could now be as high as five million.3 Almost 50% are pensioners and overall some 80% can be categorised as vulnerable.

3. The Government’s Independent Review of Fuel Poverty,4 led by Professor Hills, found that fuel poverty is a distinct and important issue. As part of the Review’s conclusions, they established a “Fuel Poverty Gap” which measures the average and aggregate depth of fuel poverty expressed as the difference between costs faced by the fuel poor and typical costs of achieving a warm home. The Review found that fuel poor households are paying £1.1 billion more for their fuel compared to typical households across England. The fuel poverty gap clearly demonstrates the enormous scale of the problem.

4. The Marmot Review Team report5 presented evidence on how cold homes lead to multiple health problems including excess winter deaths, respiratory health problems and mental health problems as well as an increased likelihood of poor educational attainment among children.

5. High energy prices have been the biggest driver in the increase in fuel poverty and the long term trend is for prices to continue rising. With every one% increase in energy prices, another 60–70,000 households are added to the number of households in fuel poverty.6

6. The recession, unemployment plus the industries investment plans estimated at c. £200 Billion to 20207 and uncertainty over new generating capacity and energy prices will exacerbate the problem. FPAG remains deeply concerned that the costs and implication of the UK’s transition to a low carbon economy, has yet to be sufficiently explored. Meanwhile, the regressive means of collecting costs added to fuel bills to fund a range of related environmental and energy costs creates consumer inequity should these costs continue to be recovered in this way and not funded via general taxation.

7. The drastic reduction in funding for Warm Front, the under spend of the budget in 2011–12 and the scheme’s complete termination in 2013, is particularly disappointing given that heating and insulation improvements represent the most rational and sustainable approach in addressing fuel poverty. It is, therefore, essential that the government implement alternative programmes to meet the target of eradicating fuel poverty by 2016.

8. The Green Deal and ECO could offer a new opportunity to assist both those households off the gas grid. However, most FPAG members believe that the Energy Company Obligation (ECO) must be dedicated to the alleviation of fuel poverty and not used to subsidise expensive measures on behalf of “Able-to-Pay” households whilst so many fuel poor household still require measures to be fully funded upfront.ousehold house

9. The table below illustrates the fundamental difficulties faced by fuel-poor households. Not only are they economically disadvantaged, they also need to spend more on fuel, in absolute terms, to achieve a warm and healthy living environment ie those who need to spend most on fuel are least able to do so and live in the most thermally inefficient properties

Fuel expenditure as a % of income

Number of households (thousands)

% of whole stock

Average full income (£)

Average fuel costs (£)

Average SAP

<5%

9,900

45.8%

41,963

1,244

59.1

5–10%

8,164

37.8%

19,832

1,338

54.0

10–15%

2,275

10.5%

12,549

1,497

47.0

15–20%

641

3.0%

9,649

1,644

42.0

>20%

620

2.9%

6,567

1,954

36.0

Total

21,600

100.0%

28,526

1,338

54.7

Source: Detailed Tables published by DECC in 2012

Prices

1. What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time?

Response

The Government’s current Energy Bill has major implications for the long term structure of Britain’s energy market, the prices paid by consumers and the extent of fuel poverty in this country. The Government states that the Bill is designed to instigate the necessary reforms to the electricity market and deliver secure, clean and affordable electricity for all consumers. Electricity Market Reform (EMR) is central to the Energy Bill and is expected to secure the £110 billion8 investment needed within the next decade to upgrade Britain’s aging energy infrastructure to move to a more diverse low-carbon energy mix, while protecting consumers from escalating energy bills.

FPAG will limit it response to just two of the elements affecting consumers bills, “social costs and green taxes”. These range from amounts consumers pay to help disadvantaged consumers, to funding energy efficiency measures for all consumers, to payments to encourage the development of renewable energy etc.

Electricity bills bear the greatest burden, as this is where renewable energy plays a role. Therefore, consumers who rely on electricity for heating and cooking are likely to be more disadvantaged than those with access to mains gas. Such levies on customer bills to pay for environmental and social policies make up around 8% (c. £90) of the total (electricity and gas) energy bill now and this will rise to at least 16% of the bill by 2020. This latter level is somewhat uncertain due to the level at which the contracts for differences for example, particularly for new nuclear, will be set. It also remains unclear as to the impact on bills of the new capacity market and the costs that will be incurred by consumers to facilitate this.

The Energy Bill seeks to resolve the following issues:

Contracts for Difference (CfDs) CfDs are contracts designed to provide long term electricity price stability to developers and investors in low carbon generation (eg carbon capture & storage, renewable and nuclear energy). Generators will receive the price they achieve in the electricity market plus a “top up” from the market price to an agreed level (the “strike price”). Where the market price is above the agreed level, the generator would be required to pay back and thus ensure value for money and greater price stability for consumers.

The CfD is a fundamental part of the Government’s proposals under the Electricity Market Reform package. The CfD will work in concert with the Capacity Market and the Emissions Performance Standard to deliver Government’s aims and objectives of decarbonisation while minimising the cost to consumers and security of supply.

The cost of CfD to consumers has the potential to vary based on the level of the strike prices, whether they will be fully or partial indexed, if there will be a refinancing clause, and how project milestones will be set ie length of commissioning windows etc. The subject is seen by some as controversial as the future of new nuclear generation has been linked to a strike price of sufficient value.

The Bill also contains provisions for Investment Contracts which take the form of an early contract for difference with developers. The intention is to transfer any agreed contracts to the CfD counterparty once it is established.

Capacity Mechanism The Government envisages that the Capacity Market will ensure an adequate level of security of electricity supply is delivered in a way that is cost-effective and complementary to decarbonisation policies. It is intended to provide adequate resources by ensuring that there is sufficient reliable and diverse capacity to meet demand, eg during winter anti-cyclonic conditions where demand is high and wind generation low for a number of days.

The Capacity Market is considered the best way to mitigate the risk of voltage reductions (brownouts) and controlled load shedding (blackouts) due to the energy market not bringing forward the economically optimal amount of capacity. It does this by enabling the System Operator to decide the level of capacity it judges is appropriate and then contracting for this capacity through an auction four years ahead.

DECC’s base case analysis shows that a Capacity Market is expected to have a net cost of £1.7 billion9 relative to a scenario of an efficient energy market—ie where the energy price is reformed to reflect consumer’s value of lost load and where the market is able to invest on the basis of scarcity rents. Whilst there is a significant range of potential bill impacts, DECC’s central assumption is a small increase in consumer bills of around £14 per year for an average domestic household. However, the costs associated with a Capacity Market could vary significantly with an upper benefit of up to £4.2 billion in DECC’s stress test and a maximum cost of £2.1 billion. This will entail bill increases considerably higher than £14 per year.

The Levy Control Framework The Government recently agreed to raise the cap on its various low carbon and social policies to reflect the new contracts for difference and capacity market arrangements through the Levy Control Framework (LCF) agreed between Treasury and DECC. The LCF budget for 2012–13 is £2.35 billion. This will increase to £7.6 billion in real terms by 2020–21. Policies covered by the current LCF include the Renewables Obligation (by far the largest element), Feed In Tariff and Warm Home Discount. In future, this will also include contracts for difference—the main contributor to the increase. The LCF does not include other Government policies, such as the Energy Company Obligation and Carbon Floor Price, nor those emanating from EU legislation, such as the EU Emissions Trading System (ETS).

Despite the tripling in size of the LCF, the Government argues that the EMR proposals will lead to a reduction in consumers’ bills relative to the counterfactual of existing policies. It estimates average bills will go down by 1% by 2020 and by six to 8% by 2030 compared with existing policies.10 In brief, the Government considers EMR will reduce bills because CfDs represent a more efficient policy mechanism, compared to the Renewables Obligation which it will eventually replace, for encouraging low carbon generation. Also, the overall package is predicted to reduce wholesale energy costs.

The Government estimated in 2011 that the full range of energy and climate change policies funded through consumers’ energy bills—namely EMR, Green Deal, ECO, ETS, CPF, Feed In Tariff, smart metering, EU products policy, Warm Home Discount—will on average by 2020 save £94 (7%) on their energy bills, compared to what they would have paid in the absence of government intervention.11 This estimate does not take into account the most recent policy developments, such as the revised LCF agreement. The Government intends to provide a revised assessment in early 2013.

The implications for the low income and fuel poor consumer are far from clear

The Government argues that while its energy and climate change policies will put energy prices up, consumers bills will on average decrease due to the beneficial impact of measures put in place through these policies, such as energy efficiency, micro-generation and Warm Home Discount. However, the Government also recognises that the policies will have significant distributional impacts across households, that is, while all consumers pay for the policies, not all consumers benefit. For example, while all consumers pay for ECO, the energy efficiency measures installed will reduce energy bills by a much greater amount than the notional cost of ECO on bills. However, consumers who do not install measures will bear the full cost of the ECO levy without receiving any benefits.

DECC therefore commissioned the Centre for Sustainable Energy (CSE) to estimate the impact on bills across different types of household. Its 2011 analysis (set out in—Estimated impacts of energy and climate change policies on energy prices and bills) primarily looks at the impact of policies on different income deciles and household types. The analysis suggests that the bottom three income deciles see the greatest benefit of policies, with energy bills reducing by between 0.4% and 1.2% as a proportion of total energy expenditure. The comparable figure for the remaining deciles is a reduction of 0.1% and 0.3%. Lower income groups are considered particularly likely to benefit from ECO and WHD.

The analysis also looks at the difference between those in the bottom three income deciles that benefit from policies and those who do not. Those who benefit should see their average bill fall by between 1.2% and 3.4%. However, those that do not benefit will see an increase in bills of between 0.2% and 0.7%. It goes onto argue that 40% of consumers in the lowest three deciles will benefit from at least one of three possible policy measures (insulation, micro-generation and bill rebate).

With respect to household types, single pensioners are identified as key beneficiaries due to the targeting of WHD and ECO Affordable Warmth at this group.

FPAG has a number of concerns with DECC’s analysis

The current available analysis does not take account of more recent policy developments which will also have a differential impact on different consumer groups. For example, the increased LCF will hit those with electricity heating particularly hard, given that the costs will be borne entirely by electricity consumers (as will the costs of FIT, ETS, CPF and WHD).

The extent to which Government analysis of the costs and benefits attributed to EMR and other policies represent a realistic assessment.

The analysis does not consider alternative, more progressive ways of funding energy and climate change policies. Research carried out for Consumer Focus by the Association for the Conservation of Energy (ACE) and Centre for Sustainable Energy (CSE) Past and future trends in environmental and social levies shows that there has been a substantial shift from taxpayer funding to energy consumer funding of policies since 1990, a trend that will continue into the future.

Government assumptions on ameliorative measures could lead to bills going up much higher if the impact assigned to certain measures is not achieved, eg products policy.

There is likely to be considerable variation within low income groups, according to, for example:

the type of property they live in, for example its suitability for ECO measures;

tenure, eg social housing generally has higher energy efficiency standards than private rented housing;

whether they have gas heating;

whether they claim passport benefits (some of the lowest income households are those that do not claim benefits to which they are entitled);

the extent to which they will (or are able to) reduce consumption as a result of feedback from smart meters;

the extent to which they are likely to buy new efficient appliances (of the various policy measures, DECC expects “products policy” to have by far the biggest impact on consumer bills); and

the extent to which they are likely to install micro-generation measures.

Achieving greater consumer equity

FPAG believes DECC should explore potential options for achieving greater consumer equity which should include:

Suppliers to provide a protected block of consumption upon which policy costs are not levied, with costs recovered from consumption above the threshold.

Moving fixed supplier costs onto unit costs (including those not policy-related such as distribution charges).

Providing social tariffs, for example a national uniform social tariff guaranteed to provide the best offer.

A tax funded compensation payment.

2. To what extent (if at all) should the Government or the regulator intervene in the market to affect the prices consumers (or certain groups of consumers) pay for their energy? Should any changes be made to the Government’s current approach?

The Government has shown a willingness to intervene on the supply side to develop particular energy industry policy objectives through the carbon floor price, contracts for differences and capacity payment proposals. This is to facilitate the construction of low carbon generation such as new nuclear and aid security of supply. The Government should now show a similar determination on the demand side and investigate whether low income and vulnerable consumers, unable to have access to the best energy deal, would be better served by a different arrangement such as “an energy best deal” based on a basket of tariffs in a similar way to a “fair trade” type arrangement. Furthermore, DECC and Ofgem should also explore the full social and financial implications of the current regressive mechanism used to recover through consumer’s bills the costs of social programmes and environmental costs to decarbonise energy as outlined above in question 1—Prices.

3. How effective is Ofgem in ensuring consumers get a fair deal? Are there any areas for improvement?

Ofgem has started to take action in this respect and is welcomed by FPAG. However, this will do little for particular consumers in being able to afford the energy they need to keep their homes warm and safe. The price of energy for the fuel poor is not inelastic and rationing is the only option to those of limited means to manage their energy bills. Adding environmental, social costs etc to bills is regressive.

4. Could it be possible to benchmark energy prices to provide greater certainty about whether consumers are getting a fair deal? If so, how might this be achieved in practice?

Ofgem receives detailed segmental analysis of all suppliers’ costs. It should be possible to ascertain if these costs are being efficiently incurred and promulgated accordingly and the required level of commercial confidentiality.

5. Could any other measures be put in place to ensure consumers are paying fair prices for energy and to provide consumers with greater confidence in this?

Recent analysis such as that published by Ofgem (see below) comparing the European mainland is useful, however, this would be even more so without distribution costs as this would highlight the particular element of wholesale competition which is not explicit:

Total Price Rankings (Prices including energy, distribution and

Electricity (all tax included)

Ranking

City

Price (€ cent/kWh)

1 (dearest)

Copenhagen

30.46

2

Berlin

25.11

3

Brussels

23.03

4

Madrid

20.91

5

Dublin

19.85

6

Vienna

19.39

-

Average

18.99

7

Stockholm

18.34

8

Lisbon

18.09

9

Luxembourg City

17.84

10

Ansterdam

17.82

11

Rome

16.59

12

London

15.32

13

Heisinki

15.17

14

Paris

13.92

15 (cheapest)

Athens

12.95

Source: E-Control and VaasaETT

Profits

1. Many consumers believe that energy company profits are the reason the energy bills have been going up in recent years. Is this perception fair?

See Answer to question 2 below.

2. Why is there so much uncertainty about the level of profits the large, vertically integrated energy companies are making? What could be done to improve clarity?

FPAG understands that the segmental accounts currently prepared by energy suppliers for Ofgem, clearly set out the profits associated with different parts of the energy supply chain. However, they lack promulgation, with a narrative, does not enable stakeholders to comment

FPAG believes that the segmental accounts should provide the robust information as to the size and source of profitability. They were reviewed in early 2012 by the accounting firm BDO and found to be broadly robust. They made a number of detailed recommendations that were considered by Ofgem. It is also a requirement that the segmental accounts can be reconciled with audited figures (prepared under International Financial Reporting Standards) published in Group accounts, and this should also acts as an important safeguard.

FPAG believes that there needs to be a clear narrative on energy costs and why they change. If consumers believe accusations of profiteering they are likely to feel helpless and disengage from the retail market. Such disengagement is not in their interests, nor is it helpful to achieving the aims of the Green Deal, Energy Company Obligation, and Smart Metering initiatives, all of which rely on high levels of consumer engagement with energy bills.

3. How useful are Ofgem’s electricity and gas supply market indicators in monitoring the level of profits made by energy companies? Could they be improved?

It is an indication only and is currently a volatile figure. Greater effort is required to make this more meaningful.

4. How useful are the segmental generation and supply statements that major energy suppliers are required to produce in understanding where companies are making their profits? 

See answer to 2 above.

5. Do Ofgem’s supply market indicators and the segmental reports provided by energy suppliers help to increase transparency and public trust in energy companies? Could they be improved to provide greater transparency?

See answers to 2 & 3 above.

6. To what extent does the way energy companies communicate profits to the general public influence the public’s perception of these companies?

The FPAG Non Supplier membership considers the Energy companies as a whole generally do a poor job of communicating the issue of profits.

Fuel Poverty

1. Is the Government on track to meet its target of eliminating fuel poverty by 2016 and will reduced Government spending in this area affect their ability to achieve this target?

FPAG believes that the government is not on track to meet its legally binding target to eradicate fuel poverty 2016.

FPAG has raised its concern that the withdrawal of all taxpayer funding for energy efficiency assistance to low-income households in England, while the number of households in fuel poverty continues to rise, calls into question whether the Government is fulfilling its obligation to do all that is “reasonably practicable” to eradicate fuel poverty by 2016 as required under the Warm Homes and Energy Conservation Act 2000. FPAG would suggest that taxpayer funded schemes can deliver better results in terms of lifting numbers out of fuel poverty. With obligations recovered from energy bills, any success in lifting households out of fuel poverty is tempered by moving others in due to the added costs on bills.

The new Energy Company Obligation (ECO) that began this year (2013) contains three new elements—Carbon Target, Affordable Warmth and a Carbon Savings Community Obligation (CSCO). Affordable Warmth and CSCO will be focused on low income households and will amount to some £540 million per annum of the new ECO’s £1.3 billion per annum (the cost of which will be recouped from all consumers’ energy bills). However, for England, this will represent a 44% cut in funding for energy efficiency schemes compared to the current schemes.12 Government’s own projections indicate ECO alone can only remove between 125,000–250,000 households from fuel poverty by 2023,13 at best a 5% reduction of the current number of fuel poor households.

Despite the long term potential benefits of Electricity Market Reform consumers’ energy bills will continue to rise. Consequently, serious measures will be required if the Government is to meet the legally binding target to eradicate fuel poverty by 2016. If this target cannot now be met, we need an honest conversation with “no stone left unturned” to make sure all households have access to affordable energy now and in the future.

The Government’s recent Energy Bill announcement14 to allow energy companies to charge households and small business consumers an extra £7.6 billion until 2020 to fund low carbon energy, plus the ongoing inexorable rise in world wholesale energy prices, must sound the alarm that time is rapidly running out to make the homes of the fuel poor, fuel poverty proof, through heating and insulation measures. Where poverty is the key driver of a cold home, the Government must also be ensuring adequate income measures through the benefit system are in place.

The average domestic dual fuel bill is now at a record high of £1,365 per annum15 creating severe additional hardship for some six million UK fuel poor households.16 The problem is even more acute for many living off the gas grid using Oil or LPG, where average fuel bills are circa £2,100 per annum.17 The Government’s Energy Market Reform (EMR) has no beneficial impact on bills between now and 2016 and adds costs from 2016 onwards.

Under the current definition of fuel poverty nearly 50% of households are pensioners (10 percent contain a person over the age of 75 or over), 34% contain someone with a disability or long-term illness, 20% have a child aged 5 or under.18 Hence the plight of the ever increasing numbers of fuel poor households has never been more serious than it is today. High energy bills cause stress and misery for many and often ill health as well for those living in a damp and poorly insulated property.

Those with the lowest incomes are the least able to absorb price rises, as fuel makes up a much more significant proportion of their incomes than is the case for those on higher incomes. The mean annual income of fuel poor households in the UK in 2010 was £11,000 compared to an average income of £32,000 for non-fuel poor households.19 In addition, those on the lowest incomes typically pay more for their energy with households with an average income of £6,500 paying £1,954 for their energy, compared to those earning around £42,000 paying £1,244 per annum.20 It is clear that a major step change in the energy efficiency of our housing stock is the only viable and long term solution if we are to have any hope of reducing the financial, physical and psychological health impacts of the ever increasing cost of energy bills. Such a change will cost money; more money than any government has been able to commit thus far.

Meanwhile, FPAG notes the Chancellor’s recent decision to recycle some £300 million of the sums to be received from the carbon price floor (c. £1.4billion to be paid by all consumers) to only industrial energy users of electricity to soften its impact, yet will not do something similar to protect the most financially disadvantaged fuel poor consumer in this context.

At the same time as the energy Industry sets course for a low carbon transformation and EMR, the future of fuel poverty, its measurement, definition, mitigation schemes and the welfare benefits system will all change. For the first time since 1978 there will no longer be a government funded fuel poverty programme in England. The devolved assemblies of Scotland and Wales, however, will keep their funded schemes which will be in addition to a GB wide new energy supplier obligation.

2. Has the Hills Review resulted in any changes to fuel poverty policy? How could its findings be used to improve the efficacy of fuel poverty policy?

Not as yet; FPAG awaits, with interest, Government announcements in this respect. Meanwhile, FPAG does have concerns regarding the current status quo. FPAG comprises of representatives of a wide range of diverse organisations which do not always share a common view or perspective on fuel poverty issues. Consequently, where a consensus can be identified, we can be confident that this shared view must be worthy of serious consideration. Such a consensus can be found in the response to specific elements of the Hills proposals for a new definition of fuel poverty, both positive and negative. However, in the interests of brevity, FPAG wishes unequivocally to declare its ongoing concerns about some aspects of the final Hills proposals:

FPAG’s main concerns:

A low income high cost measure does not sufficiently encapsulate the problem.

Affordability being determined by reference to median household expenditure.

The perceived interpretation by the Hills review of the Warm Homes and Energy Conservation Act 2000.

The large numbers of low-income households no longer being classed as “fuel poor” yet cannot afford their fuel costs.

That “reasonable costs” does not reflect affordability.

Linking high energy costs to median expenditure creates an insensitive fuel poverty measure to progress and energy price changes.

By including disability benefits such as DLA in the income calculation makes it look like those households in receipt of disability benefits are on higher incomes and exclude more of them from the fuel poverty calculation.

The proposal takes no account of the type of occupancy in considering the factors for reasonable energy costs.

Minimal recognition of the cogent arguments put forward by stakeholders in the final Hills proposals.

Member organisations of FPAG have undertaken or commissioned extensive research into how the issues in the proposed new definition might be resolved. They suggest a number of constructive improvements but all concur that the Hills’ recommendations can only be endorsed provided the “reasonable costs” element is modified to better reflect our understanding of affordability. FPAG recognises that Hills clarifies the distinction between Fuel Poverty and Poverty. However, if the problem of poverty is not captured in this context it will be a dereliction of duty by government not to have clarity of this issue laid firmly at the “door” of the DWP.

Background

In FPAG’s Ninth Annual Report we commented positively on the interim findings from the Hills Review of the fuel poverty definition and targets. In particular we welcomed the conclusion that fuel poverty is a: “distinct and serious problem; that it deserves and requires attention as recognised by Parliament in adopting the Warm Homes and Energy Conservation Act; and that the Act captures the core of the problem as being the overlap between low income and high energy costs.” We also noted and strongly endorsed Professor Hills’ emphasis on the detrimental physical and mental health consequences of living in a cold home. Fuel poverty is a significant public health problem causing considerable sickness and excess winter mortality.

The Hills’ analysis and proposals were overwhelmingly endorsed across a number of areas. Group members were supportive of the recommendation that the low income element of the fuel poverty formula should follow the official definition of poverty used in general poverty statistics. This would remove a number of significant anomalies in the current definition through, for example, use of equivalised income and by calculating income on an after-housing-costs basis.

However, members of FPAG rejected the key proposal of Hills, that the concept of affordability should be determined by reference to median household expenditure ie the “reasonable costs” threshold should be based on the median level of fuel expenditure required across all households.

As noted above, the Hills Review had recognised that the wording of the Warm Homes and Energy Conservation Act 2000 was: “entirely appropriate: we are concerned with individuals living in a home which cannot be kept warm at reasonable cost.” However, we believe that this recognition of the Act’s validity in identifying the core elements of fuel poverty does not result in these elements being transposed to the revised definition of fuel poverty. The new definition leads to large numbers of low-income households no longer being classed as “fuel poor”, yet these households clearly cannot afford their fuel costs.

We believe that this unfortunate and unacceptable circumstance results from an erroneous interpretation of the wording of the Warm Homes and Energy Conservation Act 2000. Professor Hills infers that the term “reasonable costs” refers to a situation where a household faces energy expenditure no higher than or equal to median needed spend. Clearly this approach fails to take full account of the low income aspect and the obvious fact that even lower required expenditure will not be affordable for many financially disadvantaged households. FPAG fundamentally disagrees that “reasonable costs” equates to affordability.

By linking high energy costs to median expenditure it is inevitable that the incidence of fuel poverty is subject to minimal variation even where energy costs increase significantly or, conversely, where substantial improvements are made to energy efficiency standards. We do not believe that this outcome would be intelligible or credible to stakeholders concerned to ensure that low-income households have access to affordable warmth. We see little value in an indicator that barely changes over time and does not help track progress on policy. Failure to address and resolve this issue risks bringing Government fuel poverty policy into disrepute among observers and stakeholders. Given these strong reservations we were disappointed to find that the final consultation document published by the Department of Energy and Climate Change proposed adoption of the Hills recommendations with minimal recognition of the cogent arguments put forward by stakeholders.

In responding to the final Hills proposals, we emphasised the inadequacy of Government policies and programmes and reiterated our demand for a roadmap showing how we could reach the destination envisaged in the Warm Homes and Energy Conservation Act—the eradication of fuel poverty. In this respect we welcome the support of Professor Hills in his reflections on the way forward for fuel poverty policy:

Energy efficiency policies targeted on low-income households are most effective in addressing fuel poverty.

Effective future action requires a reinvigorated fuel poverty strategy and the involvement of many Government departments.

Greater clarity is needed on: the range of actions necessary for tackling fuel poverty; how they interact together; who owns each action; the milestones towards 2016; what is going to happen if these milestones are not reached; and funding.

3. To what extent are current fuel poverty policies reaching the right people? Are there any particular groups that are currently not getting the necessary support? And will this change under the move to ECO?

Numerous comments regarding the previous success or otherwise of the Warm front and its targeting the fuel poor have been made. However, FPAG maintains the view that Warm Front has been an extremely successful programme. Since 2000 the scheme has assisted over 2.3 million vulnerable households, with an average saving of £610 per year on their energy bills, and reducing carbon emissions by six tonnes over the lifetime of the energy efficiency measures installed. 21

The financial year 2011–12 saw Warm Front re-open with a vastly reduced budget of £110 million compared to £345 million in 2010–11. It also adopted a much changed eligibility criteria with a number of benefits being withdrawn from the qualifying criteria and a SAP threshold being introduced.

Despite the significant reduction in the budget of the scheme, 2011–12 saw the first under spend in the history of the Warm Front scheme, that is to say that not all the allocated budget was spent at the end of the financial year. DECC’s own figures show that once rebates and other budget adjustments were made “Out of a total budget of £145 million for 2011–12, £50.6 million was therefore not spent and was returned to the Treasury.” FPAG estimates that this funding, had it been utilised, would have provided assistance to another 22,000 households.

There were a combination of factors behind this under spend, including a lack of marketing activity around the re-opening of the scheme to new applications, a tighter eligibility criteria and doubts amongst local authorities and community bodies about the future of the scheme. These lessons must be learned for ECO and AW etc.

Meanwhile ECO and Affordable warmth has yet to completely establish itself. Hence, it is difficult to answer some aspects of this question in the new context. However, Government’s own projections indicate ECO alone can only remove between 125,000—250,000 households from fuel poverty by 2023;22 at best a 6% reduction of the current number of fuel poor households.

FPAG and other stakeholders are concerned that some groups of households will be worse off under the move Warm Front to ECO. ECO Affordable Warmth is designed to encourage suppliers to provide a minimum package of measures at lowest cost. This will primarily consist of loft and cavity wall insulation and gas boiler replacements. The latter is encouraged by a new heating costs reduction target and is unique to the Affordable Warmth element of ECO. Suppliers are therefore likely to focus activity on large concentrations of eligible households who live in properties suitable for these low cost measures. Under Warm Front, households without gas were entitled to a larger grant (£6,500, compared to £3,500) than those with gas, in recognition of the additional costs of providing suitable heating measures. Warm Front also included “hard to reach” and “hard to treat” targets. There is no equivalent requirement under Affordable Warmth. FPAG is therefore concerned that rural households living in difficult to treat homes will lose out under the move to ECO.

ECO also includes a Carbon Saving Communities Obligation (CSCO) element, estimated to equate to an annual expenditure of £190m. 15% of this element must be targeted at households in rural areas. CSCO is similar to the current CESP programme in that help is targeted at low income areas—the 15% most deprived areas as defined by the Index of Multiple Deprivation (CESP set a 10% requirement). CSCO is likely to represent an improvement on CESP in that it does not entail the same complex scoring system as CESP, there is more flexibility over the boundaries of areas helped and the rural safeguard will mean more rural households will benefit than was the case with CESP. However, unlike Affordable Warmth, there is no heating cost reduction target to accompany the CSCO carbon targets. Thus, suppliers are unlikely to provide heating measures to households in CSCO areas.

Benefit take up and ECO

In 2009–10 up to £12 billion in means tested benefits were unclaimed, nearly 25% of all available benefits expenditure.23 In addition, up to £3.9 billion in Child Tax Credits and £4.4 billion in Working Tax credits went unclaimed.24 The proportion of benefits remaining unclaimed remains largely in line with previous years for each of these categories.

Of those in fuel poverty in the UK, 75% are either unemployed (11%) or economically “inactive” (64%).25 This, alongside the concentration of fuel poor households in the lower income deciles makes it reasonable to conclude that at least a proportion of those in fuel poverty are not claiming at least some of the benefits they are entitled to and would therefore profit from benefit take up initiatives.

FPAG would, therefore, like to see Benefit Entitlement Checks (BECs) incorporated as part of ECO targeted at fuel poor households. During incorporation of BECs as part of the Warm Front scheme, the BEC service identified on average more than £1,600 per year in additional income for those households that successfully received the service; making a life-changing difference to low-income vulnerable households in the greatest need. DECC’s decision not to continue with BECs as part of Warm Front from May 2011 and now ECO is a decision which FPAG finds hugely regrettable.

FPAG is not aware of the Government having yet conducted an impact assessment of welfare reform on fuel poverty. Indeed, in response to a Parliamentary Question from Alex Cunningham MP in September 2012 the Minister for Energy and Climate Change, Gregory Barker stated that the impact of the introduction of universal credit on levels of fuel poverty will first be assessed in 2015.26 In our view this is far too late. The Government should conduct an impact assessment on the likely impact of the welfare reforms on fuel poverty at the earliest opportunity.

4. What support is available for fuel poor households living in solid-wall and hard-to-treat properties? Could this be improved?

The Green Deal and ECO Affordable Warmth do provide an opportunity to establish an effective framework that can deliver against the twin objectives of eradicating fuel poverty and significantly reducing carbon emissions from the housing stock. Establishing the solid wall industry is a key part of the Green deal strategy. However, to assist the alleviation of fuel poverty more generally and for those affected by solid walls in particular will require:

the bringing forward of the current 2018 date by which all private rented properties must be brought up to a minimum energy efficiency standard rating, making it unlawful to rent out a house or business premise that does not reach this minimum standard.

for the bulk of the ECO to be devoted to the Affordable Warmth target and those fuel-poor and low-income households should also be prioritised for assistance under the carbon target (eg solid wall insulation).

some of the Governments “environmental” revenues to be reassigned to an ambitious energy efficiency programme including solid wall insulation.

Over the next 15 years £63 billion will be added to consumer energy bills through the carbon floor price and EU Emissions Trading System (ETS). That is an average of £4 billion a year not available for consumers to spend keeping warm, or for companies to invest in cleaner generation and smart grids. It also removes consumer spending power more generally which is more keenly felt in deprived communities. If we were to add this £4 billion towards ECO we could make many more fuel poor homes warmer, more affordable to heat and take a giant step towards the Government’s legally binding fuel poverty and carbon reduction targets.

This is the approach being taken by the French Government. It recently announced it will be insulating one million existing homes per year partly funded from the proceeds of auctioning its allocation of EU-ETS allowances.27

The Australian Government introduced a carbon tax in July 2012.28 More than half of the revenue raised will be used to help households. The assistance will be delivered in the form of tax cuts and increased welfare payments. The Australian Government claims that nine out of ten Australian households will receive some form of assistance, and of that figure, the Government claims that many low income households will receive greater assistance than the impact of a carbon price.

5. Will the Government’s proposals to ensure that consumers are on the cheapest tariff have any impact on fuel poverty? 

The moving of all consumers to a supplier’s cheapest tariff will inevitably benefit those who are currently paying a high price for their energy. However, whilst any reduction is welcome, it is understood that Prof John Hills and his team calculated that if all fuel poor households were on the best energy deal fuel poverty numbers would be reduced by circa 15%. However, on the assumption that energy supplier’s profits would remain around the current level of circa 4% and then having moved all consumers to their cheapest deal, prices are likely to rise, to some degree, in order to recover to the previous profit levels. FPAG remains of the view that the only long term sustainable solution to eradicating fuel poverty is to fuel poverty proof the homes of the fuel poor.

6. To what extent do fuel-poor households engage in switching? What are the barriers to greater levels of switching from these groups?

The fuel poor household is unlikely to switch due to several reasons. These include age, exclusion, general poverty and living in rented accommodation and are not IT savvy or internet connected etc. Under the current definition of fuel poverty nearly 50% of households are pensioners (10 percent contain a person over the age of 75 or over), 34% contain someone with a disability or long-term illness, 20% have a child aged five or under.29 Many fuel poor households do not have access to the internet. Non fuel poor households with access to the internet are more than twice as likely to change supplier compared to those that do not have internet access.

7. To what extent do fuel-poor households current take advantage of energy efficiency schemes? Could anything be done to increase uptake?

The Warm Front scheme demonstrated that with the required level of support, reasonable criteria and marketing, fuel poor households can participate in energy efficiency schemes.

However, a breakthrough to assist targeting and participation is possible but will require political intervention. FPAG understands that for the digital TV switchover Government did facilitate, with the necessary safeguards, DWP data being available to target customers on an age related basis with the offer of additional help. This inevitably assisted many elderly viewers to a smooth transition to digital TV reception. It is assumed that with this data, overlaid with other benefits data could save significant sums in targeting potential recipients and speed up the insulation of more fuel poor homes.

February 2013

1 UK Fuel Poverty Strategy 2001

2 Annual Report on Fuel Poverty Statistics 2012

3 NEA estimate November 2011

4 http://www.decc.gov.uk/en/content/cms/funding/Fuel_poverty/Hills_Review/Hills_Review.aspx

5 The Health Impacts of Cold Homes and Fuel Poverty, written by the Marmot Review Team for Friends of the Earth, published in May 2011

6 DECC fuel poverty impact assessments 2010

7 Ofgem Project Discovery

8 DECC (2012), “Planning our electric future: A White Paper for secure, affordable and low-carbon electricity”

9 DECC (2012), Electricity Market Reform – Capacity Market, IA No: DECC0103

10 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/66037/7468-contracts-for-difference-energy-bill-2012.pdf

11 http://www.decc.gov.uk/en/content/cms/meeting_energy/aes/impacts/impacts.aspx

12 “The impact on the fuel poor of the reduction in fuel poverty budgets in England” Association for the Conservation of Energy, November 2012

13 DECC (2012), Final stage impact assessment for the Green Deal and Energy Company Obligation

14 Government agreement on energy policy sends clear, durable signal to investors DECC Press notice 2012/146 .

15 Ofgem: Electricity and Gas Supply Market Indicators updated 22 November 2012

16 Consumer Focus 2012

17 DECC, Fuel Poverty Detailed Tables 2010

18 Hills Review 2011 2012

19 DECC (2012) Annual Report on Fuel Poverty Statistics 2012

20 DECC Fuel Poverty Detailed Tables 2010

21 Warm Front Annual Report 2010/11

22 DECC (2012), Final stage impact assessment for the Green Deal and Energy Company Obligation

23 DWP (2012) Income Related Benefits: Estimates of take-up in 2009-10

24 HMRC (2012) Child Benefit, Child Tax Credit and Working Tax Credit Take-up rates 2009-10

25 DECC (2012) Annual Report on Fuel Poverty Statistics 2012

26 Hansard Citation: HC Deb, 3 September 2012, c26W

27 http://www.gouvernement.fr/gouvernement/systeme-d-echange-de-quotas-d-emission-de-gaz-a-effet-de-serre-periode-2013-2020-0

28 summary of the australian government's climate

29 Hills Review 2011 2012

Prepared 26th July 2013